Australia’s CPI rose 3.8% year-on-year in January, against a 3.7% forecast and matching the prior 3.8%, according to the ABS. The monthly CPI was 0.4% in January, down from 1.0% previously.
The RBA trimmed mean CPI increased 0.3% on the month and 3.4% on the year in January. After the release, AUD/USD was up 0.23% to 0.7077.
Inflation Surprise And Market Reaction
Ahead of the data, CPI had been forecast at 3.7% year-on-year, with trimmed mean inflation pencilled in at 3.3%. AUD/USD was trading near 0.7100.
The RBA inflation target is 2–3%. In its February Statement on Monetary Policy, the RBA used an assumption of about 60 basis points of hikes this year, while markets had priced nearly 39 basis points of tightening and expected the cash rate to hold at 3.85% in March.
The RBA forecast growth of 2.1% by June, trimmed mean inflation at 3.7% by mid-year, and core inflation at 2.6% by mid-2028. Headline inflation was projected to peak at 4.2%, linked in part to the expiry of electricity rebates.
Iron ore is Australia’s largest export, valued at $118 billion a year in 2021. Technical levels cited for AUD/USD include 0.7147, 0.7157, 0.6897, 0.6821, 0.6687, 0.6663, and 0.6605, with RSI above 62 and ADX near 43.
Implications For Rates And Trading
The January inflation report came in slightly hotter than markets expected at 3.8%. This suggests that the disinflationary trend we saw in late 2025 has stalled for now. This outcome strengthens the argument that the Reserve Bank of Australia (RBA) will maintain its cautious, hawkish stance in the coming months.
This data directly supports the RBA’s recent statements questioning whether monetary policy is restrictive enough. With the core trimmed mean inflation still high at 3.4%, the central bank has little reason to consider easing policy. We should now expect the market to more seriously price in the possibility of at least one more rate hike by mid-year.
To add to this, we see that the Australian labour market remains incredibly tight, with the most recent data showing the unemployment rate holding firm at 3.8% in January. History shows us that a strong jobs market typically supports wage growth and consumer demand, which in turn makes it very difficult to bring core inflation down quickly. This underlying economic strength gives the RBA more room to keep rates elevated or even move them higher.
The external environment is also becoming more supportive for the Australian dollar. Recent trade data from China, our largest trading partner, showed a surprising uptick in factory orders, pushing iron ore prices back above $135 per tonne. This backdrop of strong commodity demand provides a fundamental tailwind for the AUD.
For derivatives traders, this points toward a few key strategies. We should consider positioning for higher interest rates by selling Australian government bond futures, as their prices will likely fall as the market prices in a more hawkish RBA. This sticky inflation environment makes rate cuts before the end of the year look increasingly unlikely.
In the currency market, the AUD/USD pair looks well-supported, now trading around 0.7077. Using options to buy AUD/USD calls with a strike price around 0.7150 could be a cost-effective way to position for further upside. Implied volatility will likely increase heading into the next RBA meeting, making long volatility strategies potentially profitable.
